Bonds In Conversation : Stretching The Limits Of The Imagination

08/05/2015 by

What is it about this week that we cannot pin down ? For I am struggling against myself and the scattered thoughts of mine, refusing to gel together to give myself a logical or even, remotely acceptable explanation for the going ons.

Now my eccentric, slightly occult-ish, nature has of course correlated it to the largest solar flare to hit Earth for the year on 5 May (Tue) and how astrologers see that “When a sudden infusion of solar information overwhelms our critical faculties, kind of overflowing our normal measurement tools, we can find ourselves quite easily at loose ends, struggling to remember where it was we were so surely headed only a day or two before.”

All I know is that the limits of our imaginations are being stretched right now – stocks, bonds, USD, negative interest rates, credits, oil and gold.

And it has not been easy if we observe price actions and market indecisions, almost as if there is an “invisible hand” behind some of the irrational moves we witnessed. It is not magic ! Possibly robots ? Since the Virtu IPO on Nasdaq just last month http://www.cnbc.com/id/102592116.

For the week, modest to major losses in stock markets around the world, higher bond yields all round (except for Brazil) that have corrected back slightly overnight (eg US 10Y -0.08%), DXY lower but finding support, and oil prices coming off in a hurry after hitting a 6 month high just when inflation expectations have swung up globally.

Weekly Chart : 10Y German Bund Futures

Take heed.
“At 2% deflation you are pretty sure that you have a poorly performing economy, but you cannot simply invert the proposition and argue that at 2% inflation you have a well-functioning economy…..The only difference is that your interest rates will be a lot closer to neutral, which is a lot higher than where they are now, and will probably have significant consequences for asset prices.” Steve Englander, Citi.

Credits have been pretty shunted from all the action this week, bond prices affected by yields but spreads have not been affected. That is mainly because of the limbo most of the new issues find themselves in, given the volatility in the EUR bond markets that has inflicted just about $430 bio in losses on the markets as of mid week, credit losses quite negligible at the moment. http://www.bloomberg.com/news/articles/2015-05-05/bond-damage-tally-340-billion-lost-as-slump-put-in-perspective

I shudder to think of a credit rout in the markets when regulators are already freaking out on the excessive volatility in the sovereign markets due to the absence of liquidity that exacerbates any move, however minute. More worrying is that “the caution is also coming from prominent regulators, like Mark Carney, governor of the Bank of England, and the units at the International Monetary Fund and the United States Treasury Department that are tasked with scouring the globe for financial threats.” http://www.nytimes.com/2015/05/06/business/dealbook/bankers-and-regulators-voice-fears-on-bond-market-volatility.html?smid=tw-dealbook&seid=auto&_r=0

That is something I would not want to put my imagination to test upon.

I do not think we shall find the answers next week although markets should swing back to Greed mode again, on a bargain hunt where not a lot of imagination would be required.

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In Singapore, we had a nice little week with Swiber and Ezra both coming out with some assurances on their bond maturities ahead. https://tradehaven.net/market/sgd-corporate-bonds-the-calls-and-the-maturities-of-2015/

I do not believe there is a observable lot of activity in Swiber and Ezra bonds given the malaise for the past half year. Prices are still not forth coming and investors are equally hestitant to cross bid offer spreads which are still pretty wide.

Yet this allowed unrated Indonesian Medco Energi to issue at a mighty decent coupon, the lowest they have ever paid, at 5.9% for 3 years in SGD. It would appear that market appetite is returning as these oil companies come back into the game, for we had Indus Gas before this and Golden Agri (commodities) some weeks back.

Good luck. Leaving with the indicative prices.

USD Asian Bonds